Macro Roundup

Boom. new paper undermines Zucman, argues that the current baseline on base erosion and profit shifting is wrong due to double counting. the change in estimates are giant, their revised estimate is that Treasury only loses 1/3 of the current estimates to to BEPS. Not in a position to judge the accounting, but if they are correct, and they make a compelling case, giant.

"...To illustrate the impact of our adjustment to resolve the issues,we offer revised estimates of the U.S. revenue lost to BEPS that are on average only one third of those found in the literature....We explain that the large share of BEA aggregate income reported in tax havens is due to a significant misinterpretation of the BEA’s U.S. international economic accounts data. The confusion stems from the accounting treatment of the activity of U.S. MNEs’ indirectly owned foreign affiliates. For BEA reporting, a foreign affiliate (parent) that owns another foreign affiliate (affiliate) will be required to report the income of the affiliate on its own income statement. This income on the foreign parent’s books is referred to in the BEA data as the equity income from investments. Equity income only arises from foreign affiliates that are indirectly-owned owned by the U.S. parent (i.e., affiliates owned by other foreign affiliates directly held by the U.S. parent). Equity income is neither dividend income nor does it represent an asset (cash or otherwise) flow between a foreign parent affiliate and its affiliate. It is only an accounting construct that is necessary because national statistics require MNEs to report affiliate-level financial information by jurisdiction....For example, in 1990 equity income represented 27% of aggregate foreign affiliate net income but, in 2016, equity income comprises 67 percent of the aggregate foreign affiliate income for U.S. MNEs. This means that in 2016 two-thirds of foreign profits are reported in at least two different countries - once in the country of the parent affiliate and once in the country of the affiliate that generated the profit from its underlying operations....Once we adjust the BEA’s income measures for equity income, we estimate the U.S. corporate tax base lost to BEPS in 2012 of between 4% ($10 billion) and 13% ($32 billion). Similarly, Zucman (2015, p. 105-106) fails to adjust for equity income in his analysis of the 2013 BEA data leading to his conclusion that 55 percent of foreign affiliate income is earned in tax havens resulting in a revenue loss of $130 billion a year (41.4% of U.S. tax revenue in 2013). Our revised estimate using his methodology is only $80 billion (25.4% of U.S. tax revenue in 2013).....Putting an end to the base erosion and profit shifting (BEPS) activity of multinational enterprises (MNEs) is on the national agenda of nearly every country in the world. While many influential papers suggest that the scope and magnitude of the BEPS problem is quite large, we show that these magnitudes are likely overstated due to the accounting treatment of indirectly-owned foreign affiliates in the BEA’s U.S. international economic accounts data. We explain how this accounting treatment leads to double counting of foreign income and to misallocations to the incorrect jurisdiction. We demonstrate an appropriate correction, and show that the correction significantly reduces the magnitude of the BEPS estimates...."
Jennifer Blouin and Leslie A. Robinson, "Double counting accounting: How much profit of multinational enterprises is really in tax havens?," Social Science Research Network, November 21, 2019, https://papers.ssrn.com/sol3/papers.cfm

Ernie, ".... Yes. But/and let's also be sober about the drivers of lower prime-age male LFPR that we should be concerned about, and the drivers we shouldn't....don’t think we should dismiss concerns over the fall in the top line rate, but the fact that demography, school, and home/family care are top-tier factors driving the delta since 2000 is worth considering.Now I’m off my PC but home/family has been structurally rising for men for at least 40 years. The cyclical enrollment story makes a lot of sense in theory but we haven’t seen that margin decline in the recovery for either men or women....5 years ago I would have predicted that school NILF was a long lagged cyclical factor and disability was a permanent one. I would have been wrong: in fact it’s been the reverse..."

McGurn’s offers’ a moral and practical defense of the current system

"....outlines of a post-Trump form of Republican populism. But there are serious objections that can’t be answered merely by dismissing critics as soulless libertarians....The solution, he says, is an economy where politicians such as himself make more of the decisions about where capital gets invested...some of us believe that cooperation is what you get in a market where workers are free to decide to whom they’ll sell their labor—and to whom they won’t.....Experience, moreover, also tells us that when competition is tethered the result isn’t cooperation. It’s collusion.....who are the real materialists, if the answer to a cultural meltdown isn’t to address the human soul but to say, “Don’t worry, we can engineer it all through regulation and the tax code”?...This kind of thing speaks to the larger objection: a want of modesty....So when Mr. Rubio and his allies complain that the high priests of capitalism dismiss his ideas out of hand, it isn’t because they believe him stupid... it’s because they believe that trusting Washington to give us a new and improved capitalism by repurposing private companies to serve the priorities of the government rather than those of their owners requires a faith far greater than any ever demanded by the Lord...."

William McGurn, "Making Capitalism Great Again?,"Wall Street Journal, November 25, 2019, https://www.wsj.com/articles/making-capitalism-great-again-11574726835

Editorial Board, "The Middle Class Always Pays," Wall Street Journal, November 28, 2019, https://www.wsj.com/articles/the-middle-class-always-pays-11574967052

“…Calculating how all this affects different income groups combines analysis of tax rates with consumption patterns and the like. Where economists have crunched the numbers, the result is grim for the middle class. Researchers at the DIW think tank in Berlin looked at Germany’s tax system in 2017 and found that median earners pay roughly the same proportion of income in taxes as the highest earners do—43%. Germans in the 60th and 70th percentiles of income pay a higher proportion of earnings in taxes than anyone else, approaching 52%.The wealthiest paid more tax on income and investment, but consumption and payroll taxes walloped the middle class. This is how Berlin balances its budget. American voters, beware. Politicians promising that Medicare for All and a Green New Deal can be financed by the rich are lying to you. The middle class will pay because that’s where the real money is….”

Europe shows how the Warren-Sanders agenda really works.

Most European nations have larger welfare and entitlement states than the U.S., though they spend less on defense. According to the Organization for Economic Cooperation and Development, government spending as a share of GDP ranges from about 56% in France to 44% in Germany and 41% in Britain.

The U.S. share of about 40% is financed largely by income taxes on the affluent and the payroll tax that funds Social Security and Medicare, plus state and local taxes and borrowing. Europe has learned the hard way that the rich aren’t rich enough to pay for their entitlements, so the Continent duns the middle class.

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Start with the income tax. Most European governments tax most household income more heavily than Washington does because they impose their highest marginal rates on lower levels of income. Germany’s second-highest marginal income-tax rate of 42% kicks in for married households earning around €112,000 ($124,000). An American couple with that income pays a marginal rate of only 22% and would need to earn $612,350 before paying the top marginal rate of 37%.

Sweden’s top marginal income-tax rate of about 55% applies to earnings as low as $47,000, and in the U.K. the second-highest rate of 40% hits taxpayers earning £50,000 ($64,000). By this standard America’s income tax is highly progressive. The U.S. top marginal rate applies only to taxpayers whose wages are 9.3 times the average wage. In Belgium the top marginal rate ensnares workers earning 1.1 times the average, and in the Netherlands 1.4 times.

The income tax isn’t enough to finance Europe’s vast welfare states, so governments also impose payroll taxes they describe as “social insurance contributions.” For a single American earning the average wage, the employer and employee payroll taxes for Social Security and Medicare average 16% of gross labor costs, according to the OECD.

In Britain the share for similar social-benefit payroll taxes is a little over 20%, and in Sweden and Germany about 40%. Such middle-class payroll taxes account for 35% of government revenue in Spain, 30% in Italy, and 37% in France and Germany, and without them Europe’s welfare systems would be bankrupt.

Elizabeth Warren has figured this out. Her Medicare for All plan includes an expanded payroll tax for employers that she says isn’t a tax on the middle class, but Europeans know better. Employer payroll taxes for social insurance account for as much as 25% of revenue in France or 20% in Belgium. This is a hidden tax on the middle class because it reduces the cash employers can offer in salaries.

Europe also imposes a value-added tax (VAT) with a flat rate averaging 21% on almost all consumption. These taxes account for up to a quarter of total government revenue in many countries. They’re regressive since lower-income households devote a larger share of income to consumption taxed by a VAT.

There are other middle-class revenue grabs. Excise taxation, including on fuel, accounts for 3% of total revenue in the U.S., but above 7% in Britain and 6.4% in Italy. As last year’s yellow-vest protests showed in France (where fuel and other excise taxes account for nearly 6% of annual revenue), this burden is more onerous for middle-class suburbanites and tradesmen than on the Ferrari-driving 0.1%.

Britain also soaks its middle class with a stamp tax on property purchases, amounting to about 1% of the price for the median home nationwide, and up to 3% for the median home in London. This discourages property transactions, making it harder for older middle-class households to cash out of their home equity while raising a barrier for the younger middle class to climb onto the property ladder.

***

Calculating how all this affects different income groups combines analysis of tax rates with consumption patterns and the like. Where economists have crunched the numbers, the result is grim for the middle class.

Researchers at the DIW think tank in Berlin looked at Germany’s tax system in 2017 and found that median earners pay roughly the same proportion of income in taxes as the highest earners do—43%. Germans in the 60th and 70th percentiles of income pay a higher proportion of earnings in taxes than anyone else, approaching 52%. The wealthiest paid more tax on income and investment, but consumption and payroll taxes walloped the middle class. This is how Berlin balances its budget.

American voters, beware. Politicians promising that Medicare for All and a Green New Deal can be financed by the rich are lying to you. The middle class will pay because that’s where the real money is.